Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Aspira Women's Health Inc. (NASDAQ:AWH) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Aspira Women's Health
What Is Aspira Women's Health's Debt?
The image below, which you can click on for greater detail, shows that Aspira Women's Health had debt of US$3.39m at the end of March 2022, a reduction from US$4.48m over a year. But it also has US$26.9m in cash to offset that, meaning it has US$23.5m net cash.
How Strong Is Aspira Women's Health's Balance Sheet?
According to the last reported balance sheet, Aspira Women's Health had liabilities of US$6.14m due within 12 months, and liabilities of US$2.98m due beyond 12 months. Offsetting this, it had US$26.9m in cash and US$1.50m in receivables that were due within 12 months. So it can boast US$19.2m more liquid assets than total liabilities.
This surplus suggests that Aspira Women's Health is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Aspira Women's Health boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Aspira Women's Health can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Aspira Women's Health reported revenue of US$7.2m, which is a gain of 46%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Aspira Women's Health?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Aspira Women's Health lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$33m and booked a US$35m accounting loss. With only US$23.5m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, Aspira Women's Health may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for Aspira Women's Health that you should be aware of.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.